Page 153 - CA Inter MCQ Book

CA RAVI TAORI CA INTER AUDIT MCQs

61 (N22R)
Bharat Bank, a nationalised bank, has branches all over India and has been the most popular public
sector bank in India for the past few years. The bank is governed by the Banking Regulations Act, 1949
and the Central Statutory Auditors of the bank, ABC & Associates, were appointed according to the
provisions of the relevant enactments. The engagement partner CA C commenced the audit with his
team of seven members so that the audit is completed on time and all the documents are submitted
before the due date. The audit at all the branches also started simultaneously and ABC & Associates was
in constant touch with all the branch auditors to ensure timely completion of the audit.

As per the audit strategy and plan, CA Q along with Ms. R and Mr. P were assigned the audit of the
advances of Bharat Bank. Advances constituted the largest item on the asset s side of the balance sheet
of the bank. Since audit of advances is one of the most important areas covered by auditors in a bank
audit, it was assigned to CA Q since he was aware of the various functional areas of the bank/branches,
its processes, procedures, systems and prevailing internal controls with regard to advances.

CA Q started with verifying whether the advances were classified as per RBI Prudential Norms. There
were five categories of advances which were available to CA Q for verification. They were: Standard
Regular, Sub Standard, Doubtful, Loss and Special Mention Accounts. An ageing analysis was available
for doubtful advances and Special Mention Accounts which was examined in detail by CA Q.

Ms. R, on being instructed by CA Q, verified the securities offered by the borrowers for the bank finance.
For a particular customer named Aquabrass Pvt Ltd., the security was in the form of delivery of goods
by Aquabrass to Bharat Bank with the intention of creating a charge thereon as security for the advance.
The legal ownership of the goods remained with Aquabrass. In case of another customer named Prism
Works, there was a transfer of a life insurance policy in favour of the bank as security. The bank had
absolute right over the policy. Ms. R examined all the relevant documents for the above two cases in
detail. She continued with her examination of other securities based on the sample selected by her.

While checking the classification of NPA, Mr. P came across a customer named Trustworthy whose term
loan instalment was overdue for 90 days at the year-end, but it was 100% secured against the office
building. The same was classified as a Substandard asset. There was another customer named Super40,
who had a cash credit account and a term loan with the bank. Super40 had been paying the instalments
on the term loan as well as the interest on the cash credit account regularly and there was no overdue
amount. Mr. P verified the drawing power of Super40 and found it to be less than the sanctioned limit
throughout the year. The outstanding balance of Super40 during the whole year exceeded the drawing
power but was less than the sanctioned limit. Both the advances to Super40 were classified as Standard
Advances since the recoveries were regular and outstanding balance in the cash credit was less than the
sanctioned limit.

On examination of large advances, CA Q noticed that a customer named Stylish N Smart Private Limited
had one funded loan (term loan) and one non funded loan (bank guarantee) sanctioned from the bank.
CA Q checked in detail whether commission earned by the bank on the bank guarantee was provided
for on accrual basis.

CA Q along with Ms. R and Mr. P verified the advances in detail and also recommended a few changes
in the classification/provisions based on the examination of the sample selected by them.

Based on the above information, answer the following questions:
I. What are the sub categories of the special mention accounts?
(a) SMA 0 (accounts showing stress signals), SMA 1 (Overdue between 31-60 days) and
SMA 2 (Overdue between 61-90 days)
(b) SMA 0 (accounts showing stress signals), SMA 1 (Overdue between 0-45 days) and
SMA 2 (Overdue between 46-90 days)
(c) SMA 0 (accounts not yet due for payment), SMA 1 (Overdue between 31-60 days)
and SMA 2 (Overdue between 61-90 days)

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